Spreading too thin?

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Many lenders warn against providers adding different populations.
Many lenders warn against providers adding different populations.

A proposal to allow heroin addicts to stay at the county-owned nursing home has faced a chilly reception from several county commissioners in Butler County, Ohio. 

The plan calls for renovating a wing of 20 beds in the 109-bed Butler County Care Facility, and allowing addicts to stay for three to seven days while they receive counseling and medication to ease withdrawal symptoms.

The practice is not uncommon among county nursing homes, particularly in poor areas of urban centers such as Chicago. But the debate has spread. Even some private skilled nursing facility operators are considering alternative models of care with these more challenging clientele. 

They include prisoners, developmentally disabled individuals and recovering drug addicts. The goals are to fill empty beds and satisfy an unmet community need. 

Yet many lenders warn that electing to fill empty beds with Medicaid residents in an effort to boost occupancy can be a short-sighted solution.

“While it might help cover operating costs in the short term, it can have the negative effect of eliminating certain financing options, such as Fannie Mae, Freddie Mac or CMBS, that typically try to limit Medicaid as a percentage of revenue,” says Matt Lindsay, vice president at Lancaster Pollard. “Providers need to cautiously balance the implications of the longer term effects with short-term occupancy and margin demands.”

Simply put, pursuing a special needs population without adequately examining whether it's the right fit for your facility can significantly damage your reputation, says Jason Stroiman, founder and president of Evans Senior Investments. 

“It essentially becomes a different home, and once you go that route it's really hard to come back,” Stroiman says.

Success stories

While many lenders cringe at the idea of mixing post-acute and long-term geriatric residents with special needs populations, it's important to note that many facilities have, in fact, done it well, according to Cheryl Phillips, M.D., senior vice president of advocacy and public policy at LeadingAge.

“There are increasing numbers of types of patients in need of skilled nursing care that aren't in the mainstream and that have some special challenges and special needs,” Phillips says. 

Many nursing homes have done a phenomenal job integrating these populations in with their current patients, Phillips says, such as by providing hospice programs for prisoners and, in at least one vivid example she recalls, rehab programs for gunshot victims.

“This nursing home started bringing in all these young, black males who'd been paralyzed from gang-related gunshot wounds,” Phillips says. “They have a whole set of different needs than your average 88-year-old demented Caucasian woman who plays bingo, and yet this facility took the time to figure out what kinds of services these individuals were going to need and how to best provide them, while also working to minimize risk to their staff and the other residents they serve.”

Phillips notes, however, that developing these types of quality programs is typically not revenue-producing for a facility and is often funded through philanthropy due to the costs involved in training staff, capital improvements and, sometimes, additional security.

In addition, she says, failures in intermingling these populations most often occur when nursing homes go about it willy-nilly.

“Facilities will say, ‘Hey, we've got empty beds so let's move everybody around so that we can free up a wing and then let's go after such-and-such population,' but they haven't looked actually to see what the specific community needs are, they haven't changed anything in their care flow or their processes or their staffing, and they haven't looked for areas of risk,” she says. “They just said ‘we can do this because we have beds and we need to fill them.'”

Reputation risks

Facilities that haphazardly pursue populations outside of what they were originally financed to serve run the risk of being labeled as inept and unskilled, and can also have trouble getting a loan or refinancing, says Imran Javaid, managing director of Commercial and Specialty Finance at Capital One Bank.

“I like lending to all types of care facilities, be it nursing homes or those serving psychiatric or developmentally disabled populations, but I definitely treat them differently, and I don't know if I've seen anyone do the intermingling piece very well,” Javaid says.

He notes that whenever he's visited facilities serving both geriatric and drug rehab patients, for example, it feels odd to him, and often seems like it doesn't serve either population very well, perhaps due to the different staff training needs of these two groups. 

“If you try to do too many things as an institution, it often turns you into a jack-of-all-trades and you aren't really viewed as good at anything,” Javaid notes.

Steve Kennedy, managing director at Lancaster Pollard, also cautions skilled nursing facility owners and operators about the introduction of an atypical resident population because it might greatly affect financing options.

“Depending on the scope of the atypical resident population, FHA/HUD leadership can designate such a facility as ‘special use,' a designation that can result in longer loan processing times, valuation haircuts and even loan rejection,” Kennedy says. 

Loan-terms caution

Dan Biron, senior vice president at Berkadia, also notes that when a loan is underwritten that you're providing assistance to seniors, you run the risk of breaking your loan covenant if you suddenly decide to add a new population to the mix. 

“A lender is just not going to be thrilled with that change and will likely not approve it,” he says.

In addition, from an investment sales perspective, the buyer pool for these types of mixed-use facilities is much more shallow than that of a traditional skilled nursing facility, and is often limited to other owner/operators operating in the same arena, says Jeff Binder, principal and managing director at Senior Living Investment Brokerage Inc. In the end, he says, it really comes down to image. 

“If you research the profile for the type of facility that has moved down this path, I think you will find a 40- to 50-year-old, capital-starved asset with a payor mix hovering around 100 percent Medicaid, and a tainted reputation,” Binder says. “Quite simply, the mixing of traditional geriatric residents with a less desirable population, even if measures are taken to isolate one group from the other, will typically further deteriorate the reputation and financial performance of the asset.”

Go deep, not wide

Rather than pursuing alternative models of care, skilled nursing facilities may want to consider making small capital improvements as a way to improve occupancy and increase revenue, Stroiman says. 

Medicare patients — the most desired residents in the industry right now — want private rooms that are less institutional and more hospitality-driven, he notes. 

“Most Medicare patients would go to a less desirable facility with a private room than to a nicer building in a semi private-room, particularly if they're going just for a couple of weeks,” Binder says. “Why not take several beds off-line and turn a few of your facility's semi-private rooms into privates? You might be giving up a bed, but you're gaining so much more in revenue.”

He also suggests small, relatively inexpensive tweaks such as adding a fresh coat of paint to the facility and installing flat-screen televisions in every room.

“Some of the smallest changes,” adds Stroiman, “can make the biggest difference at a nursing home.” 


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